I'm sure you've heard the news that the US economy is heading for a mild recession. This is the most expected recession ever. Signs of trouble started showing up over a year ago, and the signs still say we're heading for a recession.
The Federal Reserve Bank of New York says the recession probability in the next twelve months is 68.22%, the highest since 1982.
NY Fed Recession Probability Chart
A recession is when the economy shrinks; many define it as six months of negative GDP growth.
According to the Bureau of Economic Analysis, the first quarter's GDP was 1.1%, and the Federal Reserve Bank of Atlanta GDPNow estimates the second quarter's GDP will be 2.7%.
Ahead of a recession, consumer confidence drops, and people spend less and save more. That's bad news for businesses that rely on consumer demand.
The University of Michigan, Consumer Sentiment Survey, shows consumer sentiment is falling.
Consumer Sentiment Survey Chart
Ahead of a recession, banks often raise lending standards and hold more cash. The Federal Reserve Bank of New York released the first quarter's Senior Loan Officer Opinion Survey on Bank Lending Practices. Survey respondents reported tighter standards and weaker demand for commercial and industrial loans. Survey respondents also reported tighter standards for both mortgage and consumer loans and weaker demand for mortgage loans, and consumer loan demand was mixed.
The Fed is raising interest rates to fight inflation. Inflation is coming down but not as quickly as many had hoped. The Federal Reserve may have to keep raising rates higher than many expect to bring inflation down to its 2% target.
Inflation Rate vs. Fed Funds Rate Chart
How will this elusive recession begin? As Ernest Hemingway once said, "Two ways. Gradually and then suddenly." This quote is often used to describe how someone goes bankrupt. But it can also be used to describe how economies go into recession. The onset of a recession can be slow and then suddenly become more severe. I think we're experiencing a period of gradual economic weakening that may begin to accelerate.
Interest rate traders are currently pricing in rate cuts beginning in September, with six cuts over the next twelve months. If the Fed is cutting rates that quickly, I would expect it to be in response to a significant financial event or rapid slowing of the economy. I hope these expectations are wrong.
What are some things you can do to make it through a recession? There's no one-size-fits-all answer, but here are some general tips.
- Save more and spend less.
- Build an emergency fund that can cover at least six months of expenses in case you lose your income or face unexpected expenses.
- Pay down your debt. High-interest debt can eat up your cash flow and make it harder to cope with financial shocks. Try to pay off your credit cards and other loans as soon as possible.
- Consider diversifying your income. This could mean getting a part-time job or starting a side hustle.
- Review your budget and make cuts where possible. This may mean eating out less, canceling unnecessary subscriptions, or finding ways to save on your energy bill.
- Stay positive. A recession can be stressful and scary, but it's not the end of the world. Remember that recessions are temporary and usually followed by periods of growth and recovery.